Take Thorough—and Legal—Steps When Screening Tenants

Finding a desirable tenant often is a challenge, especially in an economic downturn. To make sure you don't replace one struggling tenant with another, you may be tempted to tighten your tenant screening criteria, or screen more aggressively than you have in the past.

Good screening methods will help you rent to only those tenants that will comply with lease provisions, be respectful of your property, and pay their rent on time. However, don't be tempted to use screening methods that are inappropriate or illegal in your effort to make an informed choice. Avoid prospective tenant screening traps by knowing how far you can—and should—go with the process.

Screening Mistakes Can Cost You

While large shopping center and office building owners generally have at least one attorney, if not a legal team, to advise them about how to screen prospective tenants, small to mid-size commercial property owners most likely do not have these resources available to them. However, all owners should understand the screening process so that they can avoid potential legal trouble from prospective tenants that claim that their privacy rights were violated, or that their applications were denied based on incorrect information or information obtained illegally.

Owners must comply with the Fair Credit Reporting Act (FCRA) or face legal consequences. Under the FCRA, it is a violation of federal law to apply for a credit report on someone else, even a relative, without that person's permission. The FCRA allows tenants to sue owners that have performed credit checks without their consent for damages in federal court. If successful, the tenant is entitled to recover court costs and reasonable legal fees. The law also allows tenants to seek punitive damages for deliberate violations of the FCRA. In addition, the Federal Trade Commission and other federal agencies may sue owners for noncompliance and get civil penalties.

Perform Credit Checks First and Foremost

One of the main and most important factors for tenant screening is credit—both business and personal. However, privacy issues and, in the past several years, identity theft have made it critical to responsibly and legally pull and check credit reports.

The requirements for pulling a business credit report to screen a prospective commercial tenant aren't as stringent as those that are necessary to obtain a personal credit report, because a personal credit report usually contains more confidential information about the tenant.

A personal credit report may show things indicative of whether a small prospective tenant is right for your property that can't be found on a business credit report. Business credit reports are limited because creditors don't always report late payments or defaults on them. In fact, a lack of reporting has led many owners to ask the National Association of Independent Landlords (NAIL), the country's largest provider of tenant screening and credit report services for independent owners, to do more of that than they have in the past.

Tracey Benson, president of NAIL, thinks that owners should do both business and personal credit checks when possible so that, in the event that something goes wrong with the tenant's business, you know that someone—a principal of the business or an individual guarantor—has the ability to pay for the lease obligations. A tenant that pays its business bills and personal bills shows a pattern of responsibility for all of its debts.

Lack of Consent Is Common Trap

From a legal standpoint, before you can begin the screening process you must obtain the tenant's consent for certain background checks—especially credit checks.

For example, you absolutely must have permission to pull a personal credit report. Whether permission is required to pull a business credit report still is a gray area; different credit bureaus have different rules. Stay on the safe side and get permission for both types of credit checks.

“Ethically speaking, you should get permission to check out most types of information, not just credit,” says Benson. If there is any confusion about the obligations you must meet prior to screening, find out exactly what you are required to do to check each type of background information.

Benson says that she has seen many owners try to check out tenants without permission. “Smaller property owners may think that they can check credit whenever they want to, and may not realize that it is illegal to pull a credit report without permission from the consumer,” Benson observes. After seeing owners attempting to sign for their applicants, Benson has had to tell them to go back to their prospective tenants and get legitimately signed applications. “Keep in mind that oral consent isn't good enough,” she says. “It must be in writing.”

If you are screening several aspects of the tenant's business—such as credit, rental history, and litigation—you may think that obtaining permission for all of them will involve a lot of paperwork. But there is a way to simplify the consent portion of the screening process: Get the prospective tenant's permission for all background checks on the rental application. You can add the following language to your application, just above where you and the applicant sign.

Model Language

The above-listed applicant declares that all statements made in this application are true and complete. Applicant hereby authorizes Landlord to verify all of the information in this application and obtain credit reports on the above-listed applicant. If applicant has given any false information, Landlord is entitled to reject the application and retain all application fees as liquidated damages for Landlord's time and expenses in processing this application. Applicant shall give Landlord a nonrefundable application fee in the amount of $____________.

You can use separate consent forms if you would prefer. For example, there is a standard, special form for obtaining a tenant's rental history from one or more past owners, Benson notes.

Protect Privacy with Good Record-Keeping

After you've gotten the tenant's written consent to conduct all background checks, keep it locked in a secure place for up to seven years—the point when the consent to check an applicant's credit expires. “This is confidential information and you are dealing with the threat of identity theft if it is not handled properly,” Benson warns.

Other Screening Factors Reveal Warning Signals

Business and personal credit may be the best indicator of a business's viability as your tenant and its overall success, but there are other screening factors to take into account, such as the applicant's rental history, possible evictions, commercial business criminal issues (such as tax evasion), how long the applicant has been in business, and the applicant's employment history. A prospective tenant's business and personal tax records can also give you a picture of how well the business is doing, Benson points out.

Practical Pointer: Although criminal convictions are public records that you can get at a courthouse without the applicant's consent, in some cases you can't reject the application of a prospective tenant because of a criminal conviction unless you disclose to it that you have the records.

Know Your Limits

Use, but don't abuse, screening methods to find the tenant that is right for your property. Benson says that getting permission from prospective tenants before performing background checks; evaluating credit reports, rental history, and financial status carefully to get an overall picture of whether the tenant is right for your property; and—most important—conducting every aspect of the screening process according to state law, should be your top priorities to find the information you need, responsibly.

Insider Source

Tracey Benson: President, National Association of Independent Landlords; 6300 Wilshire Blvd., Los Angeles, CA 90048; (800) 352-3395; member@nail-usa.com.

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